Unproductive Debt and the Impairment of the Real Economy

This paper discusses some of the issues and causes of modern-day failing economies. Unproductive debt and the “liberalisation” of financial services are identified to be the main reasons why the real economies of many developed countries are experiencing financial crises and are seriously threatened with recession. It highlights that the main driver that is preventing the efficient allocation of economic resources into productive uses, which enhance economic and social welfare, is the concentration of money and power. In addition, the elusive pursuit of return without risk inevitably leads to the transfer of existing wealth through a failing banking system which collaborates with hedge funds and global wealth management groups who seek low risk and high returns for the benefit of their wealthy clients. The end result is a gross misallocation of economic resources and lack of funding for new capital investment. Because of wasteful lending, commercial banks find themselves increasingly constrained by a balance sheet fatigue as a direct consequence of the resulting excessive levels of private debt. Hence, they resort to selling their loans to hedge funds and asset management companies. The paper points out that availability of funding does not create wealth unless it is directed towards economically viable projects. Moreover, it is argued that the conditions conducive to economic development hardly exist in highly indebted countries. Conversely, wasteful finance inevitably brings about financial crises and recessions. It is therefore imperative for governments to intervene and take corrective action to reduce debt and to stimulate domestic demand. It is also argued that there is no real return without risk. The promise of a return without risk leads financial intermediaries to direct funding towards the purchase of existing assets rather than being invested back in the real economy.